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Detroit's $1.45B pension suit survives

Detroit has survived initial efforts to throw out a lawsuit against the city’s two retirement systems that seeks to void $1.45 billion in debt incurred in 2005 and 2006 to fund municipal pensions.

The so-called service corporations for the two pension systems filed papers to dismiss the city’s suit on technicalities. Yesterday, U.S. Bankruptcy Judge Steven Rhodes in Detroit denied the motions to dismiss and allowed the suits to go forward.

The pension systems were underfunded by $1.7 billion in 2004, Detroit said in the complaint filed in its municipal bankruptcy. Unable to borrow more to replenish the pension funds because of state caps on municipal debt, Detroit argues that the loan transactions were a “sham” designed to evade those restrictions.

Rhodes did let Financial Guaranty Insurance Co., which guaranteed the challenged debt, intervene in the suit. He also allowed individual holders of the debt to intervene.

FGIC and the debt holders only will be allowed to oppose the suit. Rhodes won’t let them bring counterclaims against Detroit or cross-claims against other defendants in the case.

In refusing to dismiss, Rhodes said the suit passes constitutional muster because there is “case or controversy,” given the “enormous financial obligations” at issue.

Because Detroit said the transactions were a sham, the retirement systems argued that the city was impermissibly suing itself. Rhodes rejected that argument, too. He said there was no chance of a collusive suit given the stiff opposition mounted by the retirement systems and the intervenors.

The retirement systems are fighting back. They previously made counterclaims alleging that the city made fraudulent misrepresentations and denied them due process.

FGIC has said that Detroit was engaging in “opportunism and revisionist history” by contending the debt obligations are void.

A 27-day trial is scheduled to begin on Aug. 14 for approval of Detroit’s municipal-debt adjustment plan.

Detroit listed $18 billion in debt in the largest-ever municipal bankruptcy, which began in July 2013.